EUR/USD: where is the limit for dollar's decline and euro's rise?

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Investors continue to ignore the negative news on the pandemic, preferring to focus on positive messages regarding the development of coronavirus vaccines and discussions on the next package of fiscal stimulus in the United States.

As market participants become more optimistic about the global growth forecast for 2021, the defensive dollar is weakening.

Yesterday, the USD index updated its low since April 2018, dropping below 90 points.

The last FOMC meeting this year did not bring relief to the US currency.

Contrary to expectations, the Federal Reserve refrained from adjusting its bond buying program. At the same time, the US central bank confirmed its commitment to do everything necessary to support the national economy and promised to continue working with low rates until 2023, as well as with quantitative easing for a long time. As a result, after the initial growth, the greenback fell again.

Meanwhile, politicians in Washington continue to discuss the next package of assistance to the American economy, worth more than $900 billion.

The encouraging news is putting pressure on the safe dollar, which has already dipped to 89.7 points, reaching its lowest level in two and a half years.

"The USD index has all the chances for the first time since April 2018 to close the trading session on Thursday below 90 points, which will compel it to test the lows of early 2018 at 88.25 points," said Vassilis Karamanis, currency strategist at Bloomberg.

Earlier, ex-head of Morgan Stanley Asia Stephen Roach said that a large-scale increase in fiscal stimulus in the United States will lead to a fall in the savings rate and a deficit in the current account. If he turns out to be right, then the dollar may fall by another 29%, to the level of 63 points.

The main currency pair is growing for the fourth consecutive trading session, despite the fact that the coronavirus continues to rage in the EU and the US.

The data on business sentiment in the eurozone turned out to be unexpectedly strong. The largest contribution to the growth of the composite PMI of the currency bloc was made by the growth of the purchasing managers' index of the services sector, which rose to 47.3 points in December from 41.7 points recorded in November. The improvement in sentiment in the eurozone's non-manufacturing services sector amid continuing quarantines in France and Germany looks surprising. Nevertheless, due to this news, EUR/USD rose above 1.2200. Before the announcement of the Fed's verdict on monetary policy, it retreated to 1.2160, but at the end of the December meeting of the FOMC quickly returned to the 1.2200 level.

In the context of the prevailing bearish mood on the US dollar, the path of least resistance for the EUR/USD pair is to rise. At the same time, it is obvious that the pair has gone too far, grew too fast and may undergo a downward correction.

Vaccine optimism is unlikely to last long on the markets.

At some point, investors may still understand that the mere fact of approval and the beginning of the deployment of vaccines does not mean that the pandemic will immediately recede, and then the markets will begin to avert risks, and a fairly oversold protective greenback will have a chance to recover.

Until the end of the year, the EUR/USD pair will probably try to renew its multi-year highs more than once in order to get closer to the 1.2300 level, but in the end it could fall to at least 1.1800.

The material has been provided by InstaForex Company - www.instaforex.com